9/16/2013 6:45 PM ET|
5 years after the crisis: Blame Washington or Wall Street?
Five years after the crisis peaked with the collapse of Lehman Brothers, it is still possible to hear bankers claim that Washington forced them to take risks. That claim simply doesn’t have much merit, however.
It all started with a house and a mortgage.
The first is a hallmark of American society, representing the ideal of home ownership: About two-thirds of our fellow citizens own the house or apartment in which they live, encouraged to do so by factors that include being able to deduct the interest on their mortgage payments. And it is the ready availability of those mortgages that has enabled them to buy those houses in the first place.
When the financial crisis brought the entire system to its knees five years ago, the heart of the problem wasn't some esoteric investment strategy but something fairly basic: poor-quality mortgage loans, repackaged by banks and other institutions in such a way as to temporarily mask their weakness. Banks had always made these subprime loans -- issuing mortgages to borrowers with poor credit quality, or financing purchases of homes for buyers who weren't putting anything down themselves. But that had been a fraction of their business, perhaps 8% of all new mortgages in a year. By 2006, the percentage had grown to 20% nationwide, and was far higher in some parts of the country, even as homeowners were taking on debt they simply couldn't afford.
As all the postmortems take place around the fifth anniversary of the bankruptcy of Lehman Brothers, one of the most significant questions boils down to whether it was the financial institutions that made these loans and then restructured and resold them that should bear the blame for the near-meltdown of the system. Or, as others argue, was the crisis the fault of Washington (a convenient code word for politicians, regulators and their rules)?
One of those on Wall Street now viewed as having been blind to the problems that were taking shape in the mortgage world, former Citigroup (C) CEO Charles Prince, may go down in history for his comment that "as long as the music is playing, you've got to get up and dance." That is, as long as the subprime mortgage lending market was moving along and generating big profits for the industry as a whole, no bank could afford to sit it out and allow all those gains to flow to its rivals.
In the wake of the crisis, however, those who believe the blame for the near-meltdown can be laid at Washington's door seized on Prince's phrase as a way to explain what they think happened. In their view, policies ranging from the Alternative Mortgage Transactions Parity Act (which greatly increased the ranks of lenders allowed to write adjustable-rate, interest-only and other kind of mortgages that became so popular among subprime lenders) to the Community Reinvestment Act (which tried to stop discrimination in lending, but which some argue forced banks to lend to home buyers with poor credit) were responsible for the dramatic increase in subprime loans and the increase in leverage in the years leading up to the crisis. Moreover, they argue, other policies resulted in inadequate regulatory supervision of the institutions taking those risks.
Around the first anniversary of the collapse of Bear Stearns, on St. Patrick's Day of 2009, the issue came up for a formal debate at an event organized by Intelligence Squared U.S. The ranks of those arguing that Washington was more culpable included historian Niall Ferguson, who suggested that if Chuck Prince and his fellow Wall Street CEOs were dancing to the music, "you have to ask yourselves … who was playing the music." It wasn't that Ferguson didn't blame banks, he insisted, just that he and his fellow debaters blame Washington more.
Five years after the crisis peaked with the collapse of Lehman Brothers, the forced merger of Merrill Lynch with Bank of America (BAC), and the near-implosion of many other institutions, it is still possible to hear bankers claim, with straight faces, that Washington forced them to take risks. That claim simply doesn't have much merit, however.
Let's first consider it from a common-sense perspective. How willing are banks to do things that they know in their gut are foolish or ill-conceived simply because the government wants them to? If anything, recent history has shown that they put their self-interest first -- and rightly so. Rock-bottom interest rates haven't sparked a flurry of new lending in the wake of the crisis; burned by the mortgage debacle, banks are guarding against credit risk more than they are abiding by the government's clear interest in seeing lending rise in order to fuel economic growth.
Historically, when banks haven't wanted to comply with a government rule or regulation, they have a tremendous track record in compelling whatever body is responsible to reverse the decision, PDQ. Remember that it was lobbying by banks, not by the government, that finally led to the collapse of the Glass-Steagall Act more than 60 years after it had been passed. If they could succeed in demolishing such a bedrock of financial regulation, could they really have been forced into acting against their best judgment by weaker, newer rules? It seems far more probable that these were rules they could live with or work around, or even rules that some of them believed would help make them more money.
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Some of those who have made the Community Reinvestment Act the centerpiece of their arguments simply appear to be ignoring the evidence at hand. As the Financial Crisis Inquiry Commission reported in early 2011, many of the lenders who were most active in generating subprime loans weren't doing so because of the CRA -- they weren't subject to the CRA. Moreover, loans made by CRA-regulated lenders were half as likely to default as mortgages written by financial institutions not subject to the Act.
Clearly, when banks saw the chance to increase their profits by charging high fees and high interest rates on subprime loans, and then found a way to contain their risk by repackaging those loans into collateralized debt obligations that could be made to look like investment grade securities, they acted. The government wasn't holding a gun to their heads, telling them to underwrite mortgage loans for 100% of the value of a $500,000 property for a homebuyer whose annual income totaled a mere $30,000. The financial institutions were playing a giant and -- while it lasted -- very lucrative game of hot potato, all of them willing to bet that when the music (and the dancing) stopped, they wouldn't be the one stuck with the problem.
Washington isn't without its share of blame in this mess, of course. Politicians and regulators became bankers' best friends. They enabled some of the institutions most responsible for the crisis to go shopping for the most favorable regulatory regime: Countrywide Financial, for instance, opted to become a savings and loan institution, regulated by the Office of Thrift Supervision, just as the OTS was slashing the size of its regulatory staff and budget and its leaders were proclaiming their commitment to making life simple and easy for their "clients."
Policymakers also pushed back whenever regulators sought to impose new restrictions on financial institutions, as when then-CFTC head Brooksley Born suggested it would be in the best interest of financial markets to have a greater degree of oversight of the derivatives market. If Wall Street danced its way toward disaster to the music that Prince and his peers heard so clearly, then Washington failed in its role by not turning the volume down and the lights up. It didn't bring the party to an end when it was clear that there was a good chance it would all end in tears.
But the idea that Washington somehow forced mortgage lenders to suddenly toss caution to the winds is rather foolish. If we believe that view of the world then we have to view Washington's policymakers and regulators in the role of parent to reckless teenagers, responsible for setting a curfew and ensuring that they don't drive when drunk. That vision of the world is at odds with the balance of power between Washington and Wall Street as it has existed and continues to exist.
Playing the "blame game" remains a popular pastime five years after the financial crisis, and it's tremendously tempting to load a disproportionate share of that blame onto the shoulders of politicians, never a well-liked group of folks even at the best of times. The real culpability, however, belongs as much to a way of thinking as to any identifiable group: the attitude that "if we can do it, and if there's a chance we'll be better off, then we should do it."
Regulators closed their eyes to the potential consequences of new capital rules. Financial institutions focused only on the fees they could earn, donning blinkers while writing subprime mortgages that many later admitted they knew would end up in default. It's that attitude -- that largely willful blindness to the risks that were being run throughout the financial system -- we must vigilantly guard against if we want to avoid a repeat of the worst of the crisis.
Five years later, that's still not as easy a task as it should be.
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I blame Washington for handing over the funds without proper due-process.
I blame Wall Street for being spineless, greedy, good-for-nothing, cretins that begged for a bailout while bankrupting little old ladies.
Crooks, thieves and other creatures of low-character.
Fannie and Freddie's exposure to Subprime, less than $300Billion.
Fannie and Freddie's loan from the Government, $187Billion.
Fannie and Freddie's have paid back $146Billion with the rest expected to be paid off in less than 12months.
Global Deriative Markets, 500-700 Trillion. US Mortgages, around $13 Trillion.
Uncle Ben, Printing about $1Trillion per year, Japan doing nearly the same.
The person who wrote this Article is totally clueless to how this got started.
with Corporate duplicity,
led to over-multiplicity
within the Idiocracy
of Banking Toxicity.
But hey, you all go on...
keep 'blaming the victim'.
Seems par for the course these days.
No matter how many Koch Bros shills
report for duty on these daily boards,
I guarantee the public is fooled no longer.
THEY KNOW who caused it, and it darn
sure was not THEM. Good day~
When you allow politicians to pick winners and losers, they will inevitably be corrupted and choose as "winners" those who donated the most campaign dollars. So far, the scheme to address this dysfunction has been to implement more and more gov to keep a more watchful eye on Wall Street. This strategy is a complete and utter FAILURE, and it's about time we all admitted that. It's time to solve the problem once and for all - REDUCE the size and power of gov, thereby reducing most of the corruption, and let the free markets sort out the winners and losers. We'll all be better off for it.
THE CENTRAL BANKS EXPOSED:
When you can capitalize on a borrower to fail and create an environment of underwriting those loans for that soul purpose, then bundle those mortgages into a block of deeds, to sell to the overseas market, there is no one to blame but the provider of the loan. If you want to blame someone? The Question is who? Was it a scram or doing business by the book. Better yet was it "DOING BUSINESS BY THE LETTER OF THE LAW"?
The Central Banks knew what they were doing and the "NEW KIDS ON THE BLOCK" made it happen. This is democracy at its finest hour. We raised them to be greedy little bastards and then when they exercise their ability to do just that we chastise them.
They "The Young and the Restless" managed to rake in a bundle of money from loans that they INSURED TO FAIL, while knowing that the lending institutions, as a whole, were to large for the U.S. Government to allow those who provided the loans to go under.
Then the Central Banks added more bad debt and allow the mortgagees to borrow 125% of the loan to value of their homes in order for them (the home owner) to go out and buy whatever their little hearts desired. (NOT 80% BUT 125% of the value of the home). And now we are asked to believe no one saw this coming?
If the Government controls the Banks then the Government failed but I would rather believe the opposite the Central Banks control the Government.
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